The Profitability of an Organization - Essay Example

Name: Instructor: Course: Date: Strategic Management Introduction According to Hubbard, for any organization to record high profits, it must put in place effective strategic management (13). Hubbard defines the term strategic management as the activities, which are used in setting a business goals, enhance its operations, ensure cost efficient utilization of resources and make bringing together the employees and stakeholders towards a common goal in order to ensure the organization performs well in the ever changing business environment (14). According to Johnson, Scholes and Whittington, there are several factors that affect a business’s profitability (23). In relation to this, Porter developed a framework of five forces, which are useful in analyzing the profitability of an organization. The discussion therefore focuses on using the Porter’s five forces model to analyze two Australian industries, one, recording high profits and the other a low-profit company. The method used in determining the profitability of the two Australian companies A thorough secondary research using business news reports, journal articles, company official statements, books, company periodicals was conducted in order to review the structure, trends, and performance of the two identified companies. The two companies identified are, BHP Billiton, which is a high-profit company, and Nufarm Ltd, which has been recording low profits for the last one year. According to (Porter, 3), there are five forces which help in determining whether an organization is making profit or not. By analyzing the five forces, it is easy to analyze whether an organization has the ability to record high or low profits. The table below presents an analysis of the five forces developed by Porter in his model, both for BHP and Nufarm Ltd. Force Threats to profits BHP Nufarm Ltd Internal Rivalry Strong- However, BHP competitive poser remains high due to its strong profit potential Strong because of the availability of natural resources and common technology for production processes. Threat of new entrants Low due to shortage of natural resources High due to abundance and availability of natural resources Threat of substitutes Low because of low threat of new entrants High because of strong threat of new entrants Suppliers’ bargaining power High Low Buyers’ bargaining power Moderate to low because BHP has the ability to regulate the products it offers to them and there are no wide range of substitutes to choose from High because the supply of the products surpasses the demand and there are many substitutes in the market. BHP Billiton’s and Nufarm Ltd’s “Porter’s five forces analysis” The “Porter’s Five Forces analysis” provides a tactical view of the competitive external environment surrounding BHP Billiton and Nufarm Ltd. Porter’s framework makes it possible to assess the business strengths and other external factors that contribute either to BHP’s high profits and Nufarm Ltd’s low profits. Buyers’ bargaining power The BHP’s customer’s bargaining power is moderate to low since the company can put any price increments as there is strong demand for their goods and servicers in the market while the supply is limited. On the other hand, Nufarm Ltd buyers’ bargaining power is too high because the demands for their goods remain low and the influx of the markets by many businesses has made the supply of the goods provided surpass the demand and hence the Company is forced to lower the prices in order to keep selling its products. There are few substitutes to the products produced by BHP in large quantities and this ensures buyers’ bargaining powers remain low making it possible for the company to regulate their prices in such a way that they record high profits. On the other hand, the influx of many companies providing substitutes to farm chemicals, the product that Nufarm Ltd produce has further enhanced their customer’s bargaining powers hence the Company is forced to keep their prices low making it difficult for them to realize any profit. Suppliers’ Bargaining Power BHP good performance has largely been contributed by the enhanced bargaining power of suppliers in labor, materials, energy, and other sectors. Since BHP has enhanced its operations, it has reduced its capacity and this means that the overall supplier’s costs have increased. Currently, there are negligible substitutes to BHP’s products available in the markets, meaning the supplier’s bargaining power is strengthened. On the other hand, there are significant substitutes in the markets that Nufarm Ltd supplies its products, and this has weakened the suppliers’ bargaining power and hence the cost at which they acquire their various production resources has increased making it difficult for the company to run profitable operations. Threats of New Entrants For BHP, the threat of new competitors is quite low. Due to shortage of natural resources, the capacity and supply has been curtailed hence restricting the number of competitors joining the market. However, with the case of Nufarm Ltd, there is increased supply and capacity in the available market, making the environment more attractive for new entrants. Despite the fact that BHP is making huge profits, there is little if any likelihood of new entrants into its market. BHP mainly purchases its commodities from the China markets. Currently, there is a drop in commodity prices and hence the demand of ore from China has gone down tremendously. As time goes by, the demand will continue going down and the producers are well prepared for such a phenomenon. These factors will act as barriers for the new entrants (Porter 8). The farm chemical market in Australia is generally recording low profits. Therefore, there is a high likelihood that some companies will exit the markets hence stabilizing the situation. However, currently, there are few barriers of new entrants into the farm chemical markets meaning that more businesses might invade the market more. The technology for producing farm chemical is common and this makes it is easy to switch the brands. According to Porter, these two factors make it easier for new competitors to enter the already populated market (9). Threat of Substitutes According to Porter, when there are few substitutes of raw materials products in the market, the threat of substitute is quite low. In terms of geographical location, BHP is endowed with regions rich in natural resources required for its production process compared to all its competitors entering the mining market. On the other hand, Nufarm produces many substitute farm chemicals. The threat of substitutes posed to Nufarm is magnified by the fact that Nufarm is not strongly placed to overcome its substitutes’ threats. Rivalry At present, there is strong rivalry in the mining market since all the companies are competing for the reserves available. However, despite the strong rivalry, BHP remains competitive because of its strong profit potential and this means that the diminishing natural resources will not influence negatively on the industry. On the other hand, there is also strong rivalry in farm chemical market since the competitors are many and are targeting the same markets. Since Nufarm is competing with well-established companies, the main strategy that it is employing to attract customers is reducing prices and this makes it difficult for the company to record any profit. Conclusion From the paper, it is quiet clear that there are several factors that determine the profitability of a business. BHP’s porter’s five forces analysis shows that the buyer bargaining power is low, the supplier’s bargaining power is high, the threats of new entrants is limited, the threat of substitutes is minimal. Despite the strong rivalry, the company has a high profit potential and hence the company can remain competitive in the available markets, and these are the factors, which are making the company record high profits. On the contrary, Nufarm Ltd is experiencing high threats of new entrants and substitutes, the buyers bargaining power in the farm chemical markets is high because the supply is higher than the demand, the company is not adequately equipped to counter rivalry and all these factors explain why the company is performing poorly. Works Cited Hubbard, Graham. Strategic Management: Thinking, Analysis & Action (2nd edition). Frenchs Forest, Pearson Prentice Hall, 2004. Print Johnson, Gerry, Scholes, Kevan and Whittington, Richard. Exploring corporate strategy (7th edition).England: Pearson Education Limited, 2005. Print Porter, Michael E. The five competitive forces that shape strategy. Harvard Business Review (2008): 1-19. Print Read More